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Counting up costs: Benefits of accrual accounting

Knuth Farms takes an analytical approach to big decisions, such as new crop rotations, marketing and equipment purchases.

Like many farm families, Angela and Kerry Knuth have expanded and diversified out of necessity.

"The economics of today's agricultural makes you take a hard look at how you are utilizing assets and where you are spending your dollars," Angela says.

While there have been several changes over the years, one of the big steps was when the Knuths first planted milling wheat in 2013 as part of a University of Nebraska-Lincoln program that provided a premium. It also provided a 5- to 10-bushel yield increase in the following corn crop.

Angela notes compared to a corn and soybean rotation, there's about a month difference in the number of days in which a crop is growing and days in which the ground is fallow.

"We asked, 'Are we using the land base to its full potential?'" she says. "We had this land base that sits here all these months doing nothing for us."

Analytical approach

This has been a critical mindset for the Knuths, who take an analytical approach to every decision they make affecting the farm operation — including equipment purchases, new crop rotations and marketing strategies.

Kerry explains this involves accrual accounting, creating a digital model of a season before it happens, and telematics on equipment to track actual machine data to compare to modeled data to evaluate the costs and profit associated with a decision over an extended period of time. It can be time-consuming, but it pays dividends through incremental gains.

"Accrual accounting really shows the true cost of whatever piece of equipment you're looking at," Kerry says. "We separate each repair, dollars to each item, so we know which piece will cost us a certain amount, and how much a rental would cost in comparison."

"Even when we pay our insurance on our equipment and overall umbrella insurance, we spread that out over each piece of equipment," he adds. "Any consumables we purchase, like filters or certain types of oil, we make sure we piece it out to the equipment. Right now, for example, we're looking at trading combines because we're out of warranty and we've spent so many dollars on repairs the last two years. We add that to our payment and inspection costs and see what that's costing us."

The Knuths also separate every crop into its own marketing center, as well as individual fields.

"For 2019, we've got prevented plant for certain fields," Kerry explains. "So we factor that in, even though we didn't spend anything or market anything from those fields. Crop insurance costs a certain amount, but we received a certain amount because we didn't plant. In 2019, I had to include MFP [Market Facilitation Program] payments in the soybean marketing center, even though we would like to not have them, because we didn't get as much for our soybeans."

Value-added opportunities also apply, particularly when adding a new crop to the rotation. For example, to add value to the wheat they're producing, the Knuths sell wheat straw, which is used for livestock bedding and mulch for lawns.

"The grain itself would never really have provided that much of a profit, but the straw does make it worth our time," Angela says. "Because we are so close to Omaha, it's our biggest market, and we also sell to the Henry Doorly Zoo. We have some people that actually buy it right out of the field, and they might resell it themselves, so they get a discount because we don't have to handle it again. We drop the individual bales on the ground, and they come pick them up."

However, an expanded rotation brings additional value that's a little more difficult to quantify. A winter cereal crop brings an opportunity to double-crop cover crops and forage crops. Although the Knuths don't own cattle, they have worked with the University of Nebraska-Lincoln, which has provided cattle to graze forage crops seeded after winter wheat or corn harvest.

This brings additional income, as well as added benefits to soil health — such as improved infiltration and organic matter, which has allowed them to plant earlier during wet springs. This includes a three-year study grazing cereal rye after corn, and most recently, a study grazing oats after winter wheat.

Transition ahead

With their two sons, Gregory, 22, and Garrison, 20, coming on board, finding new value-added markets is a necessity. That's why they're in the process of transitioning to organic production on about 300 acres.

"The transition is 36 months from the last prohibited input, and on the third year, you start to earn a lot more income, but you have to associate what our costs are going into the transition, not making as much profit on those acres, and we have to spread those costs out over a year," Kerry says. "We were looking years ahead because of that. We know we're not going to make as much during the transition, but once we're certified organic, hopefully it's going to profitable in the long-term."

With the transition to organic comes another necessity — applying manure or litter. However, this also presents an opportunity, Angela says. That means getting more use out of their Claas Xerion 500-hp tractor.

"Right now, we're budgeting for 2020, and we're looking at buying a Bunning spreader," Angela says. "And we need manure for organic. So, we're factoring in how it will work if we buy the spreader, or if we lease it, and also how it compares to synthetic fertilizer on our conventionally farmed or non-organic acres.

"The Xerion we have is underutilized. We have leased that tractor for so many hours a year. Right now, we're behind on hours, so it's costing us. How do we make that more cost-effective for us? Spreading our own manure would be one way to do it. Another way would be seeding cover crops. There are also producers around here that need to have spreading done. Would we be able to do some custom spreading?"

"Really, we're looking at, over time, can we afford to buy that?" Angela adds. "Does that make good sense, or does it not make sense?"

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